Understanding ESG Investing: Merging Ethics with Profits
ESG factors assess a company’s operational integrity and social impact. ESG is a comprehensive framework for sustainable business, not just social responsibility. ESG assessments now help investors predict long-term viability and risks of companies, with well-structured ESG strategies often resulting in a resilient reputation and consistent performance. In contrast, weak ESG standards increase instability and financial risk. One-fourth of global professional asset management is ESG.
Components of ESG
ESG analysis breaks down into three primary areas:
- Environmental: Assesses a company’s carbon footprint and pollution control disclosures.
- Social: Culture, diversity, and community engagement at work.
- Governance: Evaluates shareholder rights, executive pay, and management-shareholder relations.
Growth of ESG Investing
Starting in the 1960s as Socially Responsible Investing (SRI), ESG evolved as investors sought ethical business models, avoiding tobacco and controversial politics. ESG investing addresses global issues like climate change by requiring companies to disclose adaptation strategies. Asset managers use ESG metrics alongside financial assessments as ESG grows, allowing investors to treat ESG performance like financial performance. ESG now includes diverse asset classes, giving companies opportunities for innovation and long-term value.
ESG in India: Progress and Policy
India has embraced ESG investing with progressive reforms and policies. Milestones include:
- 2007: RBI advised banks on CSR and non-financial reporting.
- 2008–2011: S&P ESG India Index, business CSR guidelines, and Ministry of Corporate Affairs National Voluntary Guidelines (NVGs).
- 2012–2014: SEBI required top-listed companies to report business responsibility; CSR law required 2% profit reinvestment in community initiatives.
- 2015–2019: India’s Paris Agreement commitment spurred green sector investments. Indexes like Nifty 100 ESG Index helped integrate ESG into corporate frameworks.
Development of ESG in India
Several key drivers have fuelled ESG investment:
- Sustainable economy commitment under Paris Agreement and SDGs.
- Growing ethical awareness among domestic and foreign investors.
- Indian asset managers’ growing interest and ESG fund launches.
- S&P BSE Greenex and Nifty 100 ESG Index inclusion.
Challenges in ESG Investment in India
Despite significant strides, ESG investing in India faces hurdles:
- Data Quality: Inconsistent and unreliable ESG data from public sources, reports, or news articles.
- Lack of Standards: No standardised ESG definitions or metrics, adding complexity for investors.
- Conventional Mindset: Some investors view ESG as an unnecessary expense.
- Short Track Record: Many ESG funds in India are new, lacking a substantial performance history.
- Limited Advocacy: Low awareness among investors about the benefits of ESG investments.
Future Outlook
ESG is increasingly important in modern business. ESG may become a standard for operational and ethical accountability after the pandemic as stakeholders demand more transparency. Investors see a future where sustainable practices and financial growth go hand in hand, creating a more inclusive business landscape.